There’s an old Russian proverb, popularised by Ronald Reagan, which comes up among due diligence types: trust, but verify.
It seems appropriate to keep it in mind when thinking about Berkshire Hathaway, which is a sprawling insurance company and conglomerate indulged by the market largely on the understanding that its charismatic, cunning and greedy-in-a-good-way leader will do the right thing.
Hence our interest in a series of very large derivative contracts written by Warren Buffett between 2004 and 2008, which reveal a willingness to at least work creatively within the confines of fair accounting disclosure. Read more
We have always admired Warren Buffett’s ability to combine hard headed capitalism with incredible popularity. America’s favourite billionaire and all that.
But in his latest deal to swap shares in Graham Holdings for a Miami TV station, cash and stock, Mr Buffett appears to have come out on top once again, pushing a terrific deal for Berkshire past a board stuffed with serious people. Read more
The Berkshire Hathaway annual report released on Saturday is full of information for Buffett watchers, but for those fascinated by the very large put options sold by the great Sage of Omaha, turn straight to page 47.
As of the end of 2013, and as predicted by our good friend Pablo Triana at the Esade Business School, fair value for the put liabilities of $4.7bn is now less than the $4.9bn of premium Berkshire received for writing the options.
Broadly, what that means is Warren could offer to buy back the puts at a small profit. We think it’s unlikely, but it illustrates the underlying reason for writing them in the first place – the use of billions of dollars of capital for several years. Read more
In our exploration so far of the very large put option contracts sold by Berkshire Hathaway, we have looked at the reasons to sell them (cheap float), the potential liabilities created and the mystery of Warren Buffett’s financial disclosure. Given what we thought we knew about the derivatives, it is strange that the accounting liability was not higher in the depths of the financial crisis.
On the way we have explored option pricing and the so-called greeks, as well as the revelation that Mr Buffet appears to have sold Lehman Brothers a rainbow, helped along by a series of smart contributions in the comments.
Indeed, those comments have inspired Professor Pablo Triana, Professor at ESADE business School, to return with another piece looking at the strange role of Berkshire’s own credit quality when it comes to valuing the derivatives, which may be the missing link in this valuation puzzle. Read more
Business Wire, part of the Berkshire Hathaway empire, has decided that it has been doing nothing wrong but will stop sending corporate press releases direct to the machines of high frequency trading houses.
Another win for cage rattling by Eric Schneiderman, New York attorney-general, but a line from the FT story jumps out: Read more
In the comments on our last piece on Berkshire Hathaway’s very large derivative contracts we and Professor Pablo Triana learned that Warren Buffett treats the put options he sold between 2004 and 2008 as hard-to-value Level 3 liabilities that must be marked-to-model (or myth). See page 84 in the 2009 annual report.
That helps to explain why the quarterly mark-to-market losses Berkshire reported on the contracts were not larger, given big moves in currencies and equity indices in 2008 and 2009. But in resolving one mystery it created another, because valuing large put options is typically straightforward, even if like Mr Buffett you dislike the theoretical basis for doing so, and Berkshire’s commentary and disclosure has always indicated that the contracts are of the plain vanilla variety.
This has prompted the good professor to come back with a new question: so what kind of puts did Warren Buffett sell, exactly? And in trying to answer it he has found that to Lehman Brothers at least, Berkshire appears to have sold some exotic derivatives indeed (which would raise another question, were they properly disclosed?). Read more
The Sage of Omaha is folksy, down to earth and on the whole entirely open about his philosophy and his approach. But he has also managed a trick almost unheard of in the modern corporate era: he discusses the business he has run for half a century entirely on his own terms.
If you are a investor in Berkshire Hathaway you can read the annual letter to shareholders, you can trek to Omaha to try to ask a question at the annual meeting, and that is it. When Berkshire publishes quarterly results it does so on Friday evenings without commentary beyond the dry notes to the financial statements. Just the numbers and in the name of fairness, the Sage either speaks to all shareholders, or none.
But that does leave some mysteries and Pablo Triana, a Professor at ESADE business School, has followed up his look at how Berkshire’s very large legacy derivatives positions contribute cheap financing, with an examination of what can be inferred about the derivatives contracts themselves. Read more
The consequence of his incredible success finally caught up with Warren Buffett last year. At its 44th attempt, the S&P 500 finally grew faster than the book value of Berkshire Hathaway over a five year period. Mea culpa is expected in the annual letter to shareholders next month.
What that has prompted is some retreading of the reasons why Berkshire doesn’t pay a dividend. In essence, this empire of insurance, stocks and real businesses has been built on compounding retained earnings. The Sage of Omaha keeps the money because he can invest it better than you. Read more
Actual new information about the great man and his methods is rare indeed. Warren Buffett is the investment equivalent of Churchill, endlessly dissected but forever in the context of a history he wrote himself — the annual letters to the shareholders of Berkshire Hathaway.
However Pablo Triana, Professor at ESADE business School, has shed some new light on the way the Sage has made money when it comes to his large but non mass-destructive portfolio of derivatives. Read more
Carlos Slim, the telecommunications tycoon who controls Mexico’s America Movil SAB (AMXL), is the richest person on Earth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 20 wealthiest individuals… Read more
Now, it’s not as if we’ve ever done frivolous speculation here on FT Alphaville. Plus, possibly the successor mystery is overblown: everyone knows Warren Buffett’s successor will have been at Berkshire Hathaway forever, that person will be loved by the board, and the whole thing is really about BRK’s ability to operate with enormous amounts of investor trust and goodwill (to go with its insurance goodwill, haha), etc.
It’s not new that Berkshire Hathaway’s Warren Buffett prefers productive assets to unproductive ones, but his latest letter to shareholders sets out his compelling argument…
…The major asset in this category is gold, currently a huge favorite of investors who fear almost all otherassets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however,has two significant shortcomings, being neither of much use nor procreative. True, gold has someindustrial and decorative utility, but the demand for these purposes is both limited and incapable ofsoaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will stillown one ounce at its end. Read more
Tesco has been boosted by the revelation that Warren Buffett’s Berkshire Hathaway group spent about £500m raising his stake in the embattled retailer after its shock profit warning last week, the FT reports. A regulatory filing showed on Thursday that the US billionaire’s investment vehicle increased its stake in the world’s third biggest supermarket chain by sales from 3.21 per cent to 5.08 per cent over two days – January 12, the day Tesco issued its first profit warning in 20 years, and January 13. The move by Berkshire Hathaway, which controls investments in listed entities worth about $67bn, is likely to be taken by some other investors as a sign of confidence in Britain’s biggest supermarket chain by market share.
Berkshire Hathaway is to buy the local newspaper read by Warren Buffett, in spite of his longstanding view that the press faces a future of dwindling profits. The FT reports Mr Buffett on Wednesday announced the purchase of the Omaha World-Herald Company, which operates several daily and weekly titles across Omaha and south-west Iowa. Berkshire will pay $200m, including the assumption of debt, according to the newspaper. Mr Buffett began warning on the economics of the newspaper industry as early as 1991, but on Wednesday he said the World-Herald “delivers solid profits and is one of the best-run newspapers in America”. The investment follows another recent departure from a longstanding industry view by Mr Buffett, who last month disclosed a 5.5 per cent stake in IBM worth $12bn, his first big investment in a technology sector that he had shunned in the past as too complex and opaque.
Berkshire Hathaway has taken a stake in IBM worth more than $10bn, its first big investment in a sector historically shunned by Warren Buffett, reports the FT. In a CNBC interview on Monday, the 81-year-old billionaire disclosed that he had secretly amassed a 5.5 per cent stake worth $10.7bn in the US information technology company since March. “I don’t know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM,” Mr Buffett said, citing the company’s unusual five-year plan outlining earnings per share, cash positions and shareholder-return goals until 2015.
Warren Buffett’s Berkshire Hathaway invested $23.9bn in third quarter of the year – the highest level in at least 15 years – as the investor upped equity investments and diversified away from his traditional consumer and financial company focus, Bloomberg reported. Buffett’s purchases included $6.9bn of equities, $5bn of preferred shares and warrants in Bank of America and the $9bn acquisition of Lubrizol Corporation. Buffett deployed his counter-cyclical firepower in the third quarter as stock valuations declined amid the US debt ceiling debacle and the ongoing eurozone debt saga. Partly as a result of the spending splurge Berkshire Hathaway’s cash balance has fallen from $47.9bn on June 30 to $34.8bn, as of end-September. Buffett last spent more than $20bn in a given quarter during the second and fourth quarters of 2008, respectively, Bloomberg noted.
Berkshire Hathaway, the candy-to-cargo train conglomerate controlled by Warren Buffett, will buy back its own shares for the first time, as the famed stock investor declared the market value of his own company to be extremely cheap, reports the FT. Berkshire’s board said its cash hoard could be used for share buy-backs, provided the group paid no more than a 10 per cent premium to current book value and its consolidated cash holdings did not fall below $20bn. Lex warns against reading too much into it. But Heard on the Street argues that the move may be a dangerous one, if investors see the buy back price as a ceiling rather than a floor.
General Electric has confirmed that it is to pay $3.3bn to Warren Buffett’s Berkshire Hathaway to buy back preference shares that Mr Buffett bought during the credit crisis in October 2008, the FT reports. Berkshire is being paid a 10 per cent premium on its original $3bn investment and has also been collecting a 10 per cent dividend. Berkshire Hathaway made the 2008 investment as part of a plan to shore up confidence in GE, following a sharp rise in the cost of insuring debt for GE Capital, the financial services arm, which represented about half the group at the time. GE was subsequently forced to cut its dividend and lost its triple A credit rating, as GE Capital suffered large losses. Its earnings have since rebounded, although it has been hit again over the past couple of months by turmoil in the financial markets.
Warren Buffett has hired a second money manager at Berkshire Hathaway, a move interpreted as another piece of his closely guarded succession plan into place, the Wall Street Journal reports. The Omaha-based conglomerate named Ted Weschler, a 50-year-old from Charlottesville as an investment manager. Weschler currently runs hedge fund Peninsula Capital Advisors which holds roughly $2bn in assets, says the WSJ. Weschler met Buffett last year after winning a meal with him at a charity auction. He is understood to be winding down his fund before joining Berkshire in early 2012. Warren Buffett, who turned 81 at the end of August and remains in good health, currently has no public plans to relinquish any of his roles at Berkshire. He is chairman and chief executive and oversees the company’s $110bn portfolio of stocks, bonds and other investments.
A hedge fund manager who paid more than $5m in charity auctions to have lunch with Warren Buffett has been hired to be part of the team that will oversee Berkshire Hathaway’s investments after the “Oracle of Omaha” leaves the company, the FT reports. Ted Weschler, manager of Peninsula Capital Advisors, a Virginia-based hedge fund with $2bn in assets under management, will join in 2012 to manage a $1bn-$3bn slice of Berkshire’s $66bn in equity securities, the company said on Monday. Mr Weschler is expected to serve alongside Todd Combs, formerly manager of hedge fund Castle Point Capital, who was appointed in 2010, as part of a new generation of managers who will oversee Berkshire’s equity and debt investments. Berkshire said it might add a third new manager. Mr Weschler, who is not widely known in the fund management community, first came to Berkshire’s attention when he spent more than $5m in charity auctions to have lunch with the legendary investor, according to an interview with Mr Buffett in Fortune magazine.
Warren Buffett’s Berkshire Hathaway has agreed to invest $5bn to shore up confidence in Bank of America, in a deal that underscores the billionaire’s role in stabilising US financial institutions in times of crisis, the FT reports. BofA’s shares have tumbled almost 40 per cent this year amid concerns the US bank’s troubled mortgage business could overwhelm its balance sheet, forcing the lender’s executives to reverse course and raise additional equity. News of the Berkshire deal on Thursday sent BofA’s shares sharply higher. They settled at $7.63, up 9 per cent. People familiar with the matter said that Mr Buffett on Wednesday signalled to Brian Moynihan, BofA’s chief executive, that he was willing to invest. While Mr Moynihan maintained that the bank did not need extra capital, he agreed Berkshire’s move could ease Wall Street’s nerves. “Bank of America is a strong, well-led company,” Mr Buffett said. “I called Brian to tell him I wanted to invest in it. I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them.”
Warren Buffett’s Berkshire Hathaway has agreed to invest $5bn to shore up confidence in Bank of America, the FT reports, in a deal that underscores the billionaire’s role in stabilising US financial institutions in times of crisis. News of the Berkshire deal on Thursday sent BofA’s shares sharply higher. They settled at $7.63, up 9 per cent. People familiar with the matter told the FT that Mr Buffett on Wednesday signalled to Brian Moynihan, BofA’s chief executive, that he was willing to invest. While Mr Moynihan maintained that the bank did not need extra capital, he agreed Berkshire’s move could ease Wall Street’s nerves.
Our apologies for another BofA post but analyst reaction has been coming in and though most it can be summed as “confidence boost that changes little”, we think there’s a couple of extra points worth mentioning. Read more
By John McDermott, Cardiff Garcia, and Joseph Cotterill
BofA’s Buffett bounce was at 13 per cent at pixel time, paring gains from a 20 per cent high earlier on Thursday. Part of this may be due to a reverse torpedo-like situation, according to the experts at Data Explorers. There was a 16 per cent increase in the amount of shares out on loan (a proxy for shorting) this week, which may have been partly due to hopes for profit taking on a rebound. Read more